CAIR Issue No. 42 - June 2006

INTERVISTAS ’CANADIAN AVIATIONINTELLIGENCE REPORT

In this issue…

Features Columns: Regular Reports:• South Korea Outbound Travel Market

(p.1)• Airline Market Caps (p.3)• Is There a Future for Global Distribution

Systems? (p.12)• Detention of Aircraft: The Supreme Court

Speaks (p.14)

• Airline Data-Canada (p.4)• Airline Data-U.S. (p.5)• Airport Data (p.6)• Industry News (p.7)• Ottawa Report (p.16)• Washington Report (p.18)• InterVISTAS News (p.19)

InterVISTAS’ Canadian Aviation Intelligence ReportJune 2006 Copyright ©2005 InterVISTAS Consulting Inc., all rights reserved.Page 1

Source: Korea Tourism Organization.

Japan19%Thailand

7%

Other Asia21%

United States

7%

Europe6%

Other7%

China33%

Figure 2: Top Outbound Destinations


Japan19%Thailand

7%

Other Asia21%

United States

7%

Europe6%

Other7%

China33%

Figure 2: Top Outbound Destinations

SOUTH KOREA OUTBOUNDTRAVEL MARKETJune 2006

10 Million Outbound Korean Visitors in 2005Outbound travel from Korea has increased dramatically over the past few decades. Until the late1980’s, outbound travel remained at less than one million visitors per year, but since then hasexperienced strong annual growth. The only exceptions have been a few years in the late 1990’sduring the Asian economic crisis and in 2003 during the SARS outbreak.

Outbound travel currently stands at approximately 10 million visitors, with $10 billion in tourism relatedexpenditures. The average annual growth rate over the past five years has been exceptionally strongat over 11% per year.

Figure 1: Total Outbound Travel From South Korea

Other Asian Countries Capture 80% of TotalOutbound Korean TravelThe top destinations for outbound Korean travellers wereother Asian countries, accounting for 80% of total outboundtrips in 2005. China, Japan and Thailand were the topcountries visited, together accounting for 59% of trips. TheUnited States was the largest non-Asian destination at 7%.Travel to Europe represented 6% of total outbound trips withGermany, UK and France representing the top destinations.

Angelica Sparolin

Senior Researcher

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SOUTH KOREA – CON’TTravel to Canada at 2% of Total Outbound Korean MarketStatistics Canada reported a total of 191,000 customs entries by Koreans in 2005. This representsapproximately 2% of the total outbound Korean market. Over the past five years, Korean visits toCanada have generally been increasing, up 28% from 149,000 visitors in 2000. The only yearCanada experienced a decline in visitors from Korea was 2003, when outbound travel volumesdecreased 10% during the SARS outbreak. Recovery in 2004 was strong, increasing by 28% toreach 191,000 entries, but then remained flat in 2005.

Close to Two-Thirds of Outbound Travelis for Leisure Purposes, including VisitingFriends and RelativesOutbound Korean visitors were most likely to be travellingfor leisure purposes (54%), with an additional 9% visitingfriends and relatives. Business travel represented anadditional 22% of travel while other purposes representedthe remaining 15%.

Outbound Visits Peak During SummerMonthsOutbound travel from Korea peaks in summer months, representing close to 30% of outbound travelduring each of the past four years. Travel in the first, second and fourth quarters were generallysimilar over the past four years, with the exception of 2003, when large declines were experienced inthe second quarter during the peak of the SARS outbreak.

Figure 4: Seasonality of Outbound Travel From South Korea

Korea to North American Travel ForecastsThe latest medium term international travel forecasts from the Canadian Tourism Commission (2003)and the U.S. Department of Commerce Office of Travel & Tourism Industries (2005) anticipatecontinued strong growth for Korean tourist arrivals. The Canadian forecasts anticipate overall growthof 9% for the Korea to Canada market in both 2006 and 2007. The U.S. forecasts anticipate 8%growth in 2006 and 7% growth in 2007.


VFR9%

Business22%

Others15%

Pleasure54%

Figure 3: Outbound Trip Purpose


VFR9%

Business22%

Others15%

Pleasure54%


VFR9%

Business22%

Others15%

Pleasure54%

Figure 3: Outbound Trip Purpose

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AIRLINE MARKET CAPSJune 2006

Industry Recovery ContinuesGlobal airline market capitalisation is up 31% for May 2006 over the same month last year at US$77billion. Market capitalisation levels have surpassed the 2000 level of US$73 billion.* However, duringthe first 6 months of 2006, global airline market cap has increased only 8% compared to 12% for thelatter half of 2005. Asia is the only world region showing more growth during the last 6 months, at14% for December 2005 to May 2006 compared to 5% growth for June 2005 to November 2005.Growth in market capitalisation appears to have slowed during March 2006 in most regions.

Canadian Airlines are StableWhile the year-over-year growth for Canada has remained flat, in our previous report (January 2006),it was observed that Canadian airline market cap had grown 575% since 2000. Nearly all of thisgrowth occurred as Air Canada emerged from bankruptcy. Market caps for WestJet and Air Canadaare currently at C$1.4 billion and C$2.6 billion, respectively at the end of May 2006.

U.S. Airlines Showing Improvement, But Still Below 2000 LevelsIn the U.S., domestic passenger yields reached the highest point in over 5 years, but marketcapitalisation of US$26 billion is still 33% below 2000 levels. The U.S. still has two major airlines inbankruptcy protection, Delta Air Lines and Northwest Airlines.

* Source: Dow Jones Airline Broad Market Cap. Free float market capitalisation differs from full marketcapitalisation. (Shares are adjusted for free-float if cross ownership, government ownership, private ownershipor restricted shares account for ownership of 5% or more).

Geneva Tretheway

Project Analyst

Free Float Market Capitalisation by Geography ($US Billions)*

$-

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$90

May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06

World $59 $59 $61 $58 $60 $61 $66 $71 $73 $73 $81 $80 $77 World (ex USA) $40 $41 $42 $41 $42 $41 $44 $48 $49 $49 $52 $53 $51 Canada $4 $5 $5 $4 $4 $4 $5 $5 $5 $4 $4 $4 $5 United States $19 $18 $19 $18 $18 $20 $21 $24 $24 $24 $28 $26 $26.0 Western Europe $17 $16 $17 $17 $18 $18 $19 $22 $22 $22 $23 $23 $22 Asia-Pacific $18 $18 $19 $18 $18 $18 $19 $18 $19 $19 $21 $22 $21

May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06


AIRLINE DATA – CANADATraffic and Load Factors on Canada’s Major Air CarriersMay 2006

Passenger TrafficRevenue Passenger Kilometres

CapacityAvailable Seat Kilometres Load Factor

Air Carrier % Changeover 2005

% Changefrom 2004

% Changeover 2005

% Changefrom 2004

Changeover 2005

Change from2004

Air Canada +2.7% +9.5% -1.4% +3.3% +3.3 pts(to 83.2%)

+4.7 pts(from 78.5%)

Domestic(Mainline) -3.2% +0.8% -1.2% +0.4% -1.6 pts +0.3 pts

Jazz +66.5% +120.0% +66.9% +87.6% -0.2 pts +10.7 pts

International& Charter +5.3% +13.5% -1.5% +4.6% +5.4 pts +6.6 pts

WestJet +31.9% +74.3% +21.1% +47.4% +6.3 pts(to 76.9%)

+11.8 pts(from 65.1%)

Analysis:• Air Canada domestic traffic and

domestic capacity decreased by 3.2%and 1.2% respectively in Maycompare to the 2005 level. Thisresulted in a load factor decrease of1.6 points. Domestic capacitycontinues to be transferred to ACJazz.

• Air Canada RPK growth was led bytransatlantic and transborder trafficincrease. The two regions’ trafficfigures increased 9.9% and 6.5%respectively. A modest 1.5% decreasein international capacity pushedinternational load factor upward 5.4points over May 2005.

• WestJet recorded an eighthconsecutive year-over-year increase inload factor during May 2006, rising 6points to 76.9%. Traffic increased by32% and capacity increased by 21%over May 2005, both led in part byexpanded transborder service to theU.S.

OTHER CARRIERS:LOAD FACTORS

CanJet: not reported

-5%

0%

5%

10%

15%

May-05

Jun Jul Aug Sep Oct Nov Dec Jan-06

Feb Mar Apr May

Int'l RPK Int'l ASK

Air Canada InternationalAir Canada International

0%5%

10%15%20%25%30%35%

May-05


Feb Mar Apr May

RPK ASK

WestJetWestJet

Air Canada Domestic Mainline Air Canada Domestic Mainline

-10%

-5%

0%

5%

10%

May-05


Feb Mar Apr May

Dom RPK Dom ASK

Jazz data is not includedin this graph


AIRLINE DATA – U.S.U.S. Airlines Release May 2006 Traffic Figures

Traffic Data - May 2006

Airline Traffic(RPMs – millions)

Capacity(ASMs – millions) Load Factor

1,897

11.3%2,399

21.9%79.1%

7.5 pts

809

15.4%1,049

6.7%77.2%

5.8 pts

5,959

13.7%7,761

7.1%76.87%

4.4 pts

17,648

14.6%9,437

11.9%81.0%

1.9 pts

210,160

4.5 pts12,125

2.1%83.8%

2.0 pts

12,245

3.7%15,156

.03%80.7%

2.6 pts

9,516

9.7%12,412

10.0%76.7%

0.4 pts

6,207

5.6%7,177

8.7%86.5%

2.9 pts

25,556

7.7%6,948

10.4%79.9%

2.7 pts

319

37.2%421

45.5%75.9%

10.1 pts

Notes: 1. Mainline operations only.2. Load factor includes scheduled service only.

Sources: Carrier traffic reports.


Toronto Vancouver Montréal-Trudeau Calgary Edmonton Ottawa Winnipeg Halifax Victoria Kelowna Saskatoon Regina St.

John’sApril +4.0% +3.9% +5.7% +3.5% +5.5% +0.1% +4.3% -0.2% +2.6% +18.8% +6.0% +3.8% +9.8%May +6.7% +5.5% +3.6% +12.2% +12.0% +5.5% +8.0% -4.5% +5.8% +26.3% +13.5% +5.7% +8.5%June +6.3% +4.0% +7.5% +10.1% +13.9% +3.4% +2.9% -0.5% +6.8% +22.7% +10.9% +12.4% +12.4%

2nd Quarter +5.7% +4.5% +5.6% +8.6% +10.4% +3.1% +5.0% -1.8% +5.1% +22.6% +10.2% +7.3% +10.3%July +3.6% +3.4% +4.0% +11.2% +11.7% +4.8% +4.5% -9.7% +1.2% +15.9% +5.2% +10.9% +14.0%

August -1.1% +2.7% +1.5% +12.7% +8.8% +4.4% +4.6% -6.4% +5.2% +26.4% +10.3% +2.4% +8.9%September +4.5% +2.6% +7.4% +7.9% +13.5% +7.1% +6.6% +0.3% +2.9% +16.1% +12.9% +13.9% +8.9%3rd Quarter +2.2% +2.9% +4.1% +10.7% +11.2% +5.4% +5.1% -5.6% +3.1% +19.6% +9.3% +8.8% +8.0%

October -0.1% +4.3% +3.7% +7.1% +16.7% -0.7% +6.4% -0.7% +3.1% +16.1% +11.8% +12.8% -0.9%November +0.6% +5.2% +4.1% +12.1% +10.7% -2.5% +6.2% +3.0% +8.5% +24.0% +18.0% +15.6% +5.0%December -0.6% +0.5% +4.3% +10.3% +4.9% -3.5% +5.4% +5.6% +3.8% +19.1% +12.2% +9.5% +7.9%

2005

4th Quarter +0.0% +3.2% +4.0% +9.8% +10.4% -2.2% +6.0% +2.4% +4.9% +19.6% +13.9% +12.5% +3.6%Full Year +4.6% +4.4% +5.4% +10.6% +10.5% +3.6% +6.5% -0.4% +5.5% +19.3% +12.3% +10.6% +8.2%January +1.1% -1.7% +1.4% +9.1% +10.7% +1.0% +2.8% +5.4% +6.2% +20.3% +10.1% +4.4% +9.7%February -0.5% +1.5% +2.1% +8.7% +10.5% +0.2% -0.6% +1.2% +1.4% +11.0% +3.0% -2.8% +7.0%

March +3.1% +3.5% +6.6% +9.0% +13.6% +3.9% +2.0% +4.8% -3.5% +15.4% +0.1% -3.8% -7.8%1st Quarter +1.3% +1.3% +3.6% +8.7% +11.8% +1.8% +1.4% +3.8% +0.9% +15.5% +4.4% -0.8% +2.0%

2006

April +1.2% +4.3% +6.2% +19.5% +20.4% +3.8% +0.7% +6.1% +4.2% +17.9% +9.5% +13.9% +13.1%

Sources: Transport Canada and individual airports’ traffic reports.

If your airport is interested in providing InterVISTAS Consulting Inc. with its monthly passenger statistics, please email Doris Mak at [email protected].

Summary of Total Year-Over-Year Passenger Traffic Performance at Selected Canadian Airports


NEWS ARTICLESAIR CANADA UPDATEAIR CANADA PILOT WAGENEGOTIATION TO BEGIN

On 5 June, AirCanada pilots and

management began negotiating wages andpension terms for the first time since Air Canadaemerged from bankruptcy and began making aprofit. The Air Canada Pilots Association seeksto restore wages to the level experienced priorto the concessions package negotiated duringthe bankruptcy process in 2003 and 2004.

AIR CANADA HAS NEW WAYS TO TURNAIRCRAFTAir Canada has launched a test project ofdifferent processes and procedures to turnaircraft faster on the ground to improveefficiency and combat delays. Processes andprocedures being tested include using bothforward and rear doors for enplaning anddeplaning passengers, boarding aircraftcleaners before all passengers deplane, splittingpriority boarding by class, and assistingpassengers with accessibility needs as thecleaning is finished.

AIR CANADA JAZZ LAUNCHES DAILYYEAR-ROUND TORONTO-SALT LAKECITY SERVICEOn 8 June, Air Canada Jazzlaunched daily, non-stop,year-round service between Toronto and SaltLake City using Bombardier CRJ-705 jet aircraft.

WESTJET UPDATEWESTJET SETTLES SPY DISPUTE

WestJet agreed topay $15.5 million

($5.5 million covering Air Canada’s legal costsand $10 million to charity) to settle the WestJet– Air Canada dispute over alleged corporatespying and unauthorised data collection byWestJet executives. Chairman and CEO CliveBeddoe apologised to Air Canada and itsChairman, President and CEO, Robert Milton,for the “misconduct.”

WESTJET LAUNCHES WESTJETVACATIONS INC.On 1 June, WestJet launched its new subsidiaryWestJet Vacations Inc. WestJet Vacations Inc.specialises in custom-made air and hotelpackages that will leverage the carrier’s existingscheduled network to 33 cities across NorthAmerica.

WESTJET ANNOUNCES FALLSCHEDULE ENHANCEMENTSWestJet will increase frequencies betweenselected cities across Canada and the UnitedStates effective 7 September through 29October. Service between Calgary and FortMcMurray increases from one non-stop flight 6days per week to two non-stop flights daily.Service between Calgary and Las Vegasincreases from two non-stop flights per week toone non-stop flight daily. Direct service willbecome available between Vancouver and LasVegas twice per week. Service betweenVancouver and Maui increases from one non-stop flight 3 times per week to one non-stopflight daily. Service between Vancouver andHonolulu increases from one non-stop flight 4times per week to one non-stop flight daily.

WESTJET ANNOUNCES MORECONVENIENT GATES IN TORONTOPEARSONWestJet will consolidate its domestic andinternational charter Toronto operations inConcourse C at Terminal 3 in Toronto PearsonInternational Airport effective 16 June. WestJettravellers making connections on WestJet’sdomestic flights will enjoy the shortest walkingdistance between their check-in counter anddeparture gate compared to travellers of otherairlines serving Toronto.


NEWS ARTICLESOTHER CANADIAN AIRLINENEWSCANJET - GOVERNMENT AIR TRAVELAGREEMENT

CanJet Airlines signed anagreement with theGovernment of Canada to

provide volume savings for governmentpersonnel travelling on business. Theagreement could provide CanJet with a boost intraffic and the government with more traveloptions and cost savings.

TRANSAT A.T. RECORDS SECOND BESTQUARTER

Transat A.T. Inc. recorded an8.6% revenue increase, comparedwith second quarter 2005, to $792

million. Profit increased 3.4% to $68.5 millioncompared with the second quarter 2005.Growth in revenues mainly resulted fromincreased business activity, fuel surcharges and2005 acquisitions, such as the acquisition ofTravel Superstore Inc. based in Hamilton,Ontario.

U.S. AIRLINE NEWSALASKA AIRLINES REACHESTENTATIVE AGREEMENTS WITHINTERNATIONAL ASSOCIATION OFMACHINISTS

On 26 May, AlaskaAirlines reachedtentative agreements

with the International Association of Machinistson two new deals. One agreement coversclerical, office and passenger serviceemployees, including customer service andreservations sales agents, while the secondagreement covers the airline's ramp service andstores agents, including aircraft ground-handlingworkers. More than 3,700 employees will beaffected by the agreements. A ratification voteis expected to begin in two weeks to settle theterms of the accord.

ALASKA AIRLINES APPLIES FOR MOREMEXICAN FLIGHTSOn 26 May, Alaska Airlines applied to the U.S.Department of Transportation to fly non-stopfour days a week on the Seattle-Cancun andPortland-Los Cabos routes and three days aweek between Portland and Puerto Vallarta. Ifapproved, the new seasonal flights will operatefrom the end of October to the end of April. Thefollowing cities in Mexico are currently served bythe carrier from Los Angeles: Loreto, LosCabos, Puerto Vallarta, Mazatlan, Manzanillo,Ixtapa/Zihuatanejo, Guadalajara, Mexico Cityand Cancun.

DELTA AIRLINES SEEKS TO TERMINATEPILOTS’ PENSION PLAN

Delta Airlines plans toseek termination of itspilots’ defined benefit

pension plan. The concessions packageapproved in May 2006, which included an initial14 percent pay cut and assurances the pilotsunion will not fight any company effort toterminate the pilots' pension, was the secondsuch agreement that the pilots agreed to in twoyears. Delta promised the union a $650 millionbank note if the pilot pension plan is terminated.

U.S. AIRLINES WANT RATE INCREASEU.S. airlines are being hurt by a governmentdelay to raise rates for mail shipments to coverrising fuel costs. However, the U.S. PostalService, the Defence Department and UnitedParcel Service (UPS) say the governmentalready overpays for international mail under theexisting rate-setting program. The U.S. PostalService, UPS and FedEx Corp. support market-based rates, which allows the market todetermine what airlines can charge for air mail.


NEWS ARTICLESU.S. AIRLINE NEWS – CON’TJETBLUE TO FLY DIRECT FROMSYRACUSE TO ORLANDO THIS JULY

JetBlue plans to fly directlybetween Syracuse and

Orlando starting 20 July afterSyracuse offered a $635,000 incentive packageto JetBlue. All airlines serving Syracuse havebeen offered varying levels of incentives.American Eagle took advantage of the airport’smonetary incentives to launch flights betweenSyracuse and Dallas/Fort Worth last year.

CARGOCARGOJET REPORTS GROWTH INTRAFFIC AND REVENUES FOR FIRSTQUARTER OF 2006

The Cargojet IncomeFund released its firstquarter results on 26

April, showing double-digit growth in revenuescompared to the same period last year.Revenues increased 14.6% to $31.4 million,while expenses grew 21% to $25.4 million,largely as a result of increased fuel expenses.Freight carried rose 6.8% to 530,000 pounds peroperating day.

FEDEX PLANS TO INCREASEINDIANAPOLIS CAPACITY BY 30%

FedEx announcedexpansion plans to itsIndianapolis hub to

increase package processing capacity by morethan 30% to 99,000 packages per hour. Asmany as 800 additional employees may behired. Indianapolis is the second largestdomestic FedEx hub behind Memphis. Theanticipated operational date for the expandedsystem is December 2008.

JADE CARGO INTERNATIONAL TOSTART OPERATIONS

Jade CargoInternational is a jointventure all-cargo

operator formed by Shenzhen Airlines (51%ownership) and Lufthansa Cargo (25%ownership). Deutsche Investitions undEntwicklungsgesellschaft, a large Germandevelopment finance institution, owns theremaining 24%. Jade will take possession of itsfirst aircraft, a 747-400ERF, at the beginning ofAugust and will initially serve Amsterdam andSeoul each three times a week from itsShenzhen hub. Jade will be taking possessionof another five 747-400ERFs by the end of2007.

WORLD AIR FREIGHT TRAFFIC ROSE1.8% IN APRILAccording to the latest ACI FreightFlash data,worldwide freight volume increased by 1.8%over April 2005. For the past 12 months,worldwide freight volume grew by 2.5%.International traffic increased by 3.7% whiledomestic freight volume fell slightly by 0.7%.

PEOPLEMEYER NAMED COMMERCIAL VP FORYVR AIRPORT SERVICES

Jim Meyer has beennamed Vice President,Commercial for YVR

Airport Services. Meyer is currently working onthe Cyprus Airports Project at Larnaka, Cyprus.


NEWS ARTICLESPEOPLE – CON’TGUIOMARD NAMED NEWCOMMISSIONER FOR IRELAND’SAVIATION REGULATION

On 13 April, CathalGuiomard has beenappointed as the newCommissioner for AviationRegulation by Mr. MarinCullen T.D. Minister for

Transport. The principal functions of theCommission are to regulate airport charges atDublin Airport and aviation terminal servicecharges levied by the Irish Aviation Authority.

OTHERPATA TO ADDRESS ECONOMICBENEFITS OF OPEN SKIES AT UNWTOROUNDTABLEPATA will address the economic benefits of airservices liberalisation at the UNWTO’sMinisterial Roundtable on Asia-Pacific TourismPolicies on 13-15 June in Macau, China.According to a study conducted by InterVISTASConsulting, liberalising a further 320 air routescurrently not operating in an “Open Skies”environment would generate traffic growth ofalmost 63%, which is equivalent to $490 billionin GDP (equivalent to an economy the size ofBrazil). This study is available atwww.intervistas.com.

SABRE REPORTS 80% E-TICKETSISSUED WORLDWIDE

Sabre reported that 80%of all tickets issuedworldwide through its

global distribution system are now electronic.Sabre thinks the industry is not likely toimplement e-ticketing 100% by the IATA 2007deadline. However, carriers that sell most of theworld’s tickets will be e-ticket compliant by thedeadline. Sabre Airline Solutions hosts thereservations systems of over 100 airlines aroundthe world. Over 50 airlines are using theSabreSonic Ticket Interline Electronic TicketingHub to issue e-tickets.

CHINA PLANS 48 NEW AIRPORTSChina plans to open 48 newairports over the next five yearsin anticipation of the 14% annualpassenger growth estimated by

the Civil Aviation Administration of China(CAAC). The plan will increase the total numberof airports in China to 190 by the year 2010.

WORLD PASSENGER TRAFFIC ROSE INAPRILAccording to the latest ACI PaxFlash data,worldwide passenger traffic rose 6.5% in Aprilrelative to the same period in 2005. HeavyEaster travel coupled with major Chineseholidays in April contributed to the growthdespite fuel surcharges driving up ticket prices.For the past 12 months, worldwide passengertraffic experienced a 4.8% average increasewhile international and domestic traffic rose by6.1% and 3.8% respectively.

FIRST A380 SERVICE SYDNEY-SINGAPORE

Singapore Airlines,which is taking

delivery of the world's first A380 in November,will operate its first commercial flight inDecember on the Sydney to Singapore route. Itwill operate the aircraft with 480 seats in a 3-class configuration, roughly 100 more than its747s.


NEWS ARTICLESOTHER – CON’TEUROPEAN UNION AND SINGAPORESIGN “HORIZONTAL AGREEMENT”The European Commission has signed an airservices agreement with Singapore whereby thelatter will accept designation of any Europeanairline from any EU country. The so-called'horizontal' agreement would allow, for example,Italy to designate Air France for service fromMilan to Singapore. The agreement does notreplace the bilateral agreements betweenSingapore and individual EU states. It onlyclarifies a broader range of carriers that can bedesignated. To date, 400 bilaterals of EU stateshave been changed to horizontal agreements.

VIRGIN BLUE ORDERS EIGHT 737SVirgin Blue of Australia orderedeight 737-800s for replacementof leased aircraft in its fleet and

that of New Zealand based Pacific Blue.

EUROPEAN UNION EXPANDS THEEUROPEAN COMMON AVIATION AREA

On 9 June, the EU, theTransport Ministers ofIceland and Norway (whichare not part of the EU, but

are part of the EU's Common Aviation Market)and the Transport Ministers of Albania, Bosniaand Herzegovina, Bulgaria, Croatia, the FormerYugoslav Republic of Macedonia, Romania,Serbia, Montenegro and the United NationsMission in Kosovo, signed an agreement toexpand the Common Aviation Area to includesouth-eastern Europe. The EU's hope is toincorporate the whole neighborhood of the EUinto the common market by 2010. In addition toremoving flight restrictions, airline ownershipand control provisions will be relaxed andcommon safety and security, competition, andconsumer protection rules will be applied.


IS THERE A FUTURE FOR GLOBALDISTRIBUTION SYSTEMS?15 June 2006

As airlines increasingly look for ways to reduce cost and the Internet provides an ever more effectivevehicle for the carriers to distribute their product, one has to ask what the future holds for the globaldistribution systems (GDS). The GDS share of passenger reservations is shrinking in every corner ofthe world as consumers and increasingly travel agencies take advantage of airline websites. Internetreservations cost the carriers only a few cents per booking versus the several dollars associated withthe GDS transaction. To make matters worse, with declining yields, the GDS portion of the travellers’ticket has been increasing. But are the GDS really destined to be the next dinosaurs of the travelindustry or will there remain a role for these mega-systems?

GDS: Still EfficientThe GDSs are still the only efficient way for the travel agencies to deal with complex bookings thatinvolve multiple carriers and interline pricing. These systems provide, in a matter of seconds, acomprehensive listing of all itinerary options and available interline prices that meet a customer’stravel requirements. Consider the challenge of checking availability for travel from Canada to India. Ifyou wanted to research the travel options on the internet, you would have to check the web pages ofall carriers serving the major connecting points in both Europe and Asia and then the websites of thecarriers operating from those intermediate cities onwards to India. A thorough evaluation mightinclude twenty or thirty individual searches – just to get you there, never mind the return. You wouldthen have the problem of purchasing back-to-back fares which are probably more expensive than thethrough interline fares and they do not offer en route protection in the case of irregular operations.This is often not a viable option. The consumer either accepts the limited itineraries available on oneor two carriers’ websites or calls their travel agents who have the benefit of a GDS system.

Travel Agent Community: Still Loyal Users of GDSDespite the best efforts of the airlines, the travel agencies remain loyal to their GDS providers. Asagencies do not pay the segment booking fee, GDS costs are not as much of a concern for them.Using the GDS means a set of familiar transactions that are quicker and more convenient than themultitude of unique interfaces offered by the various carrier websites. While an agency may well usethe booking engines of a few preferred carriers, once the customer’s travel falls beyond those carriers’networks, they will revert back to the GDS. A GDS booking and ticket is automatically processedthrough the relevant ticket settlement plan and may well be integrated with the agency’s revenueaccounting system – which is often part of the GDS package. Even their office computer equipmentand internet service are most likely supplied at no cost by the GDS provider. And yes, for those whomight have a more cynical view, some GDS companies have been known to block the carriers’website IP addresses on their equipment and internet service. It is unlikely the travel agencies will bethe force driving the GDS to extinction.

Next Generation GDSAfter decades of passing their costs on the airlines, the GDS providers are now having to respond tothe industry cost pressures and have begun to at least hold the line on their fees. Unfortunately, theirability to drastically reduce costs to the level needed to be competitive with Internet distribution isseverely hampered by their systems operating environment and architecture. The major GDSs arebased on technology that, while truly revolutionary in its day, is badly outdated by modern standards.Their ability to operate and maintain these systems more economically is increasingly limited.

Nigel Brownlow

Vice President, AirlineBusiness Development


GLOBAL DISTRIBUTION SYSTEMS?– CON’TTo compensate, some providers offer “light” products that incur a lower booking fee but then sacrificeon the depth of the availability search. But, while taking the global distribution capabilities out of theGDS may let them reduce cost, it removes their most important product feature.

New companies have stepped forward in an effort to meet the requirement. Typically formed aspartnerships of travel industry experts and leading technology companies, the next generation GDSproviders have leveraged the advantages of the latest development tools to build more economicalsystems that are optimized for Internet communication. These companies are able to offer a globaltravel distribution service at a fraction of the cost of the legacy systems. Their challenge, however, isbuilding the critical mass they need to become a realistic alternative. Travel agencies won’t startusing these systems until they provide access to a wide range of carriers. To the travel agenciesthere is limited economic advantage to switching to the newer systems. You might think that thecarriers would be lining up to sign on with the next generation systems but they seem to be waiting forthe travel trade before incurring the cost of an additional distribution channel. The next generationsystems might be cheaper, but if the travel agencies are not using them there is no benefit to thecarriers.

The Future of GDSWhat will break this apparent impasse? There is a need for affordable global travel distributionservices and there is an increasing number of products to service that need. But with the disconnectbetween the users (the travel agents) and the purchasers (the airlines), it may take years before thetechnology becomes widely distributed. Good news, perhaps, for the current GDS providers whowould be wise to use the time to revamp their products. Ironically, the very invention that shifted themarket away from the GDS might be the one that brings them back.

The low cost carrier model owes much of its success to the reduction in distribution cost achievedthrough direct internet sales. This business model is beginning to saturate in many markets and wesee the slow re-introduction of some of those practices that were originally an anathema to the LCC.Increasingly, LCCs are looking to interline and, code-share, and are even struggling to distributethrough the GDS. Most LCCs distribute their product through their hosted reservation systems.These systems have not been developed to interface with each other or to the GDS. Whileadvancements are being made in this regard, there is really no single source reservation system thatwill allow travel agencies or consumers to view and book itineraries across multiple low cost carriers.

As the global share of travel reservations made on low cost carriers continues to rise, the travelmarket will increasingly demand the degree of convenience that it has enjoyed with the legacy airlinesand traditional systems. The next generation GDS may become the vehicle by which the low costcarriers are able to provide an integrated global service. The new systems offer an affordablemechanism to distribute integrated itineraries connecting cities served by different low cost carriersthroughout the world. Demand from the consumer might well be the force that drives the travelagencies to adopt the new systems. If and when they do, we can expect that legacy carriers willhappily follow suit. The role the GDS and travel agencies play in airline reservations will continue tofall as low cost carriers expand and as the Internet becomes more universally available. Whether theGDS systems become a niche market service or whether the introduction of new more affordablesystems enables a higher degree of participation may well depend on the value the low cost carriersplace in the expanded market reach a GDS service provides.


Gerard A. ChouestPartner

Bersenas JacobsonChouest Thompson

BlackburnLLP

DETENTION OF AIRCRAFT:THE SUPREME COURT SPEAKS12 June 2006

The failure of Inter-Canadian in 1999 and that of the Canada 3000 group (which then included RoyalAviation) in 2001 resulted in conflicting claims upon the aircraft which had been operated by thosecompanies. The fleets were generally leased and various acts of default had occurred. Thecompanies were also in arrears with respect to charges levied in respect of airport and navigationalcharges. Hotly contested litigation, pitting the authorities who provided the services against a groupof lessors, proceeded in Ontario and Quebec. On June 9, 2006, the Supreme Court of Canada foundin favour of Nav Canada and the various airport authorities.

The Inter-Canadian case reached the Supreme Court through the Quebec Court of Appeal while theCanada 3000 case came through Ontario. Before the provincial appellate courts the lessors prevailedon all issues, but only by 2 to 1 split decisions. While there are certainly nuances, the majoritydecisions are in agreement on the major issues. The two dissenting judges were also largely inagreement. The decision of the Supreme Court was unanimous and upheld the views of thedissenting judges. A review of the principal issues follows.

Direct Liability to PayThe Civil Air Navigation Services Commercialization Act (CANSCA), which created Nav Canada as aprovider of navigation services for aircraft flying in Canadian air space, stipulates that “the owner andoperator of an aircraft are jointly and severally liable for the payment of any charge for air navigationservices imposed by the Corporation in respect of the aircraft.” (emphasis added)

Nav Canada relied on a simple reading of these words to argue that the aircraft lessors were directlyliable to pay the outstanding charges. The lessors held legal title to the aircraft in question. As suchthey would normally and properly be referred to as “owners” and the Act would appear to have theeffect contended for by Nav Canada. However, all thirteen judges (three each in Ontario and Quebecand seven in the Supreme Court) rejected this argument. In doing so, they laid emphasis upon thefact that CANSCA is part of a fabric of harmonious aeronautical legislation which has as its leadinginstrument the Aeronautics Act. In accordance with that scheme of legislation, the word “owner” hasa particular meaning. It designates the “registered owner” and that in turn is a title reserved for the airoperator certificated to provide an air service. In this case, the failed carriers were the registeredowners and only they are contemplated by the “direct liability” provision. Accordingly, the lessors arenot obliged to pay the navigation charges. However, as will be seen in the following, they are likely tohave a powerful motivation to pay, as only by paying (or posting security) will they secure the releaseof their aircraft from detention.

This month we have invited Gerard A. Chouestto comment on the recent Supreme Court decision regarding seizure of aircraft. Mr. Chouest is a partner of Bersenas Jacobsen Chouest Thomson Blackburn LLP, basedin Toronto. His practice includes regulatory, commercial and general litigation. Herepresents aviation clients in civil litigation as well as in litigious matters proceeding beforethe Canadian Transportation Agency and Human Rights Commissions. He advises clientsin enforcement actions undertaken by Transport Canada and in relation to carrier licensing,regulatory compliance and insurance matters. He can be reached at 416-982-3804.


DETENTION OF AIRCRAFT: - CON’TThe Right to Detain AircraftThe Airports Act and CANSCA contain provisions which allow the authorities and Nav Canada todetain aircraft “owned or operated” by a person liable to pay a proper charge. The right to detain isnot automatic, and may be exercised only if authorized by court order. The question which arose iswhether this right of detention can be set up against a lessor which holds legal title to the aircraft.

Two main objections to the detention remedy were raised in the courts below. The first objection isbased on a presumption relating to the displacement of property rights. This is the argument whichcarried most weight with the original motions judge in Ontario (who also found in favour of the lessors)and it was also accepted by the Quebec Court of Appeal.

The second objection found favour in each of the provincial appellate courts. The Justices noted thatthe relevant statutes do not contain any mechanism for dealing with difficult cases in which rightscome into conflict. There are no provisions to define priorities among different persons with interests,no explicit power of sale and nothing to indicate how the proceeds of any sale should be distributedamong the different parties. The Ontario Court of Appeal also found support for the position of thelessors in the history and context of the legislation.

In over-ruling the courts below, the Supreme Court began by insisting on the importance of context,and in particular “the commercial reality of the marketplace where a statute is intended to function”.The detention powers were granted to the private sector providers of the services in question to makethe ventures attractive. These entities are required to provide the services according to a cost-basedtariff. On the other hand, the lessors are sophisticated parties who have chosen to invest in theindustry, they are in a better position to protect themselves against the types of losses in question andthere are legal precedents for the detention remedy.

Although the Supreme Court does not quote him in this respect, it appears the Justices agreed withthe comments of Justice Juriansz, dissenting in the Ontario Court of Appeal, which emphasize thecommercial reality of modern lease arrangements. The rights of the lessors, he stated, “should not beregarded as those of uninvolved third party strangers to the outstanding charges . . . . They leasedtheir aircraft . . . to be flown using the air navigation services provided by Nav Canada, and to use theairport facilities and services provided by the Airport Authorities. The outstanding charges are notgeneral debts of the Canada 3000 Companies, but those debts incurred by the use of the Lessors’aircraft just as the Lessors contemplated and expressly authorized”.

There are several ancillary points which may be summarized as follows: There is simply a power ofdetention, and no implied power of sale. The right to detain is not automatic, but must be authorizedby court order. The order is discretionary and the judge making the order may impose restrictions toaddress fairness concerns, provided however that she may not do anything which would deprive theauthorities of their right to be paid in full. The order affects the aircraft and not persons, thereforeeach and every aircraft may potentially be detained and held until all charges owed by the relevantoperator have been paid. Once an order is made, it will apply to the air frame and all essential aircraftequipment. Lessors of parts, engines for example, will not be entitled to remove the parts over whichthey have an interest.

This decision is likely to have repercussions for the negotiation of aircraft leases. The importance ofsecurity deposits, whereby lessors seek to insulate themselves from the consequences of lesseedefault, may increase and lessors are likely to seek other ways to secure themselves from theconsequences of these statutory encroachments on their title and interest.


OTTAWA REPORTJune 2006

Transport Minister Introduced a New Draft of theCanada Airports ActThe On 15 June 2006, The Minister of Transport, Infrastructure andCommunities introduced Bill 39:C-20, a new draft of the Canada AirportsAct. The new act comprises 253 sections, significantly longer than thepervious draft (37:C-27, 210 sections). It is now approaching the length ofthe Canada Transportation Act, which requires only 278 sections to governall modes of transport, and is almost double the size of the Competition Act(128 sections) which covers all sectors of the Canadian economy. The billcontains highly detailed regulations of corporate governance of an airport, for example specifying inlaw the percent of directors required to call a special meeting of the board (section 117), specifying inlaw whether a board member may participate in a board meeting by telephone (section 121),specifying in law the minimum size of board committee, specifying in law, whether the chair of anaudit committee may call a meeting, etc.

New Aircraft Emergency Response Requirements AnnouncedOn 18 May, the Minister of Transport, Infrastructure and Communities announced new aircraftemergency response requirements for Canadian airports. The amendments to the Canadian AviationRegulations (CARs) will require on-site aircraft rescue and firefighting at airports serving more than180,000 passengers per year. All airports, regardless of size, are still required to prepare and submitfor approval an emergency response plan. The Airports Capital Assistance Program has beenmodified to provide funding to assist all qualifying airports with the implementation.

Federal Government Commits to New Transportation ActionsThe Minister of Transport, Infrastructure and Communities announced that in the coming months, hewill be advancing practical, specific measures in the areas of sustainable infrastructure, transportationgateways and trade corridors, and transportation security including public transit. The goal is to buildon the vitality of Canadian cities and communities, and use the transportation system to makeCanada more competitive in the global economy. In addition to the $16.5 billion of federal investmentin infrastructure over the next four years, the government will use legislative frameworks such as a Billto amend the Canada Transportation Act, to ensure an efficient and effective transportation network isavailable to Canadians.

NAV Canada Reached Tentative Agreement with CAW LocalNAV Canada has reached a tentative agreement with Canadian Auto Workers (CAW), Local 1016.The agreement affects NAV Canada employees who provide flight planning services, simulationsupport for air traffic control training, aeronautical information services and design, and flight dataanalysis for billing and publications support.

Supreme Court Allows NAV Canada to Seize Aircraft for UnpaidServicesThe Supreme Court of Canada has ruled that NAV Canada has the right to seize aircraft for unpaidservices. The right extends to those who own, lease or finance aircraft operated by air carriers. NAVCanada can now recover the $8 million of unpaid customer service charges relating to thebankruptcies of Inter-Canadian in 1999 and Canada 3000 in 2002 (see Chouest’s article on p. 14).

Sam Barone

Regional Vice PresidentOttawa, ON


WASHINGTON REPORTJune 2006

House Committee Approves $15 Billion forFAAThe House Transportation Appropriations Committeeapproved a $15.3 billion budget for the Federal AviationAdministration (FAA) for the 2007 fiscal year. The approvedbudget is $1.6 billion more than the Administration’s requests.The three main components of the FAA funding – airport,facilities and equipment, and operations will all receive morefunding than the previous year’s level. The Essential AirService program will receive $117 million. The FAA fundingwould come from the aviation trust fund and the general fund. No restriction is placed on the FAATelecommunications Infrastructure program.

Congress Does Not Block Foreign Ownership NPRMBoth the House and Senate chose not to proceed with an appropriations bill amendment which wouldhave forced a four month delay in the DoT adopting its Supplemental Notice of Proposed RuleMaking, to liberalise interpretation of the foreign ownership limits on airlines. The SNPRM would allowforeign investors more management freedom of certain airline decisions such as marketing, whilereserving critical decisions around safety and security to US citizens. Finalising the SNPRM is viewedas a requirement for EU approval of a proposed US-EU phase 1 open skies treaty.

Ecuador Elevated to Category 1 StatusAfter a reassessment of Ecuador’s civil aviation authority, the Federal Aviation Administration (FAA)has elevated Ecuador’s safety rating to Category 1 from Category 2 status. The FAA in 1995 gaveEcuador a Category 2 safety rating, which restricted Ecuadorian flights to the U.S. This meansEcuador can now oversee air carriers in accordance with International Civil Aviation Organization(ICAO) safety standards. Venezuela has also been elevated to Category 1 status in May 2006.

New Regulations to Strengthen Air Cargo SecurityThe Transportation Security Administration (TSA) issued rules to strengthen air cargo security. Thenew measures, to be phased in over the next six months, require background checks and enhancedsecurity training for freight forwarder employees and extend security areas of airports to includeramps and cargo facilities.

Complaints on U.S. Airlines on the RiseAccording to the U.S. Department of Transport Air Travel Consumer Report for March, the number ofconsumer complaints had increased between 2003 and 2005. Consumer complaints include airlineservice, disability-related issues and discrimination (other than disability). From 2003 to 2005, on-time arrival rate dropped from 82% to 77% and cancellation rate increased from 1.8% to 1.9%. Thenumber of mishandled baggage per 1,000 passengers also increased by 44%.

Jon Ash

PresidentInterVISTAS-ga2 Consulting Inc.

Washington, D.C.


InterVISTAS’ Canadian Aviation Intelligence Report is a collection of information gathered from public sources, suchas press releases, media articles, etc., information from confidential sources, and items heard on the street. Thussome of the information is speculative and may not materialise.To inquire about advertising opportunities or to provide comments/feedback on the InterVISTAS’ Canadian AviationIntelligence Report, please contact Rob Beynon at [email protected] or 1-604-717-1864.To subscribe, please send an email to [email protected] unsubscribe, please send an email to [email protected]

INTERVISTAS NEWSJune 2006

New Publications Available at www.intervistas.com

InterVISTAS recently released a study entitled “The Economic Impact of Air ServiceLiberalisation.” The study predicts that liberalising a further 320 air routes currently not operating inan “Open Skies” environment would generate traffic growth of almost 63%. This study was jointlysponsored by Boeing, the Pacific Asia Travel Association, and other global travel organisations.

The presentation titled, “Overcoming Turbulence: Recovery of the Airline Industry”, presented byDr. Tretheway, Executive Vice President, at the Airline Finance Conference in Toronto on 6 June2006, is now available.

InterVISTAS Upcoming Speaking Engagements• Mr. John Weatherill, Director, Airline Planning

World Low Cost Airline Congress (Americas): Miami, FL – 26 June 2006Mr. Weatherill will lead a workshop for airline planners and airport marketingpersonnel. The workshop will educate participants on how to evaluate andstructure incentive programs to ensure the objectives of both airports and airlinesare met.

• Mr. Martin Copeland, Senior Vice President, Airline Marketing & PlanningWorld Low Cost Airline Congress (Americas): Miami, FL – 27 June 2006Mr. Copeland will participate in a panel discussion with low cost airline routeplanning personnel.

• Dr. Mike Tretheway, Executive Vice PresidentFinancing Aviation Infrastructure: Toronto, ON – 17 October 2006Dr. Tretheway will be the keynote speaker delivering the luncheon presentationtitled, “The Role of Government Policy in Airport Finance.”

• Mr. Solomon Wong, Vice President, Security & PlanningAVSEC: Sydney, Australia – 17-19 October 2006Mr. Wong will be delivering a presentation titled, “Border and Aviation Security: TheComplexity of the Challenge.”

CAIR Issue No. 42 - June 2006

Documents

Transcript of CAIR Issue No. 42 - June 2006